Deck 12: Exploring Central Banks and Their Impact on the Economy and Financial System

Question 1

Central banks usually offer some services directly to the public as well as to banks and securities dealers.

Answer 1

False

Question 2

Money can be anything that serves as a medium of exchange in the purchase of goods and services.

Answer 2

True

Question 3

Money may be used to store purchasing power; defined this way, however, we must exclude savings accounts from the money supply definition.

Answer 3

False

Question 4

The power to regulate the quantity and value of money has been delegated by Congress to the U.S. Treasury Department.

Question 5

Control of the nation's money supply is important because money is so scarce, making it extremely valuable and sought after.

Question 6

Control of the money supply's growth rate affects the growth rate of the economy.

Question 7

A member of the Board of Governors of the Federal Reserve System who completes a full term cannot be reappointed to the Board.

Question 8

The president of the Federal Reserve Bank of Philadelphia is a permanent voting member of the FOMC.

Question 9

Each Federal Reserve bank is a corporation owned by the member banks in its district.

Question 10

Member banks of the Federal Reserve System are entitled to receive a 6 percent dividend on the Federal Reserve bank stock they hold and may elect a majority of the directors of the Federal Reserve bank in their district.

Question 11

Required reserves earn no interest.

Question 12

All members of the Federal Open Market Committee have voting power with the Chairman of the Federal Reserve Board having the power to cast tie-breaking vote on any monetary policy decision.

Question 13

The FOMC must meet at least 4 times a year.

Question 14

Each Federal Reserve bank sets its own discount rate and may do so without Federal Reserve Board approval.

Question 15

It is possible to have at least 2 members of the Federal Reserve Board from the State of New York.

Question 16

A par bank is one that issues stock (equity shares) with a stated value printed on the face of each share of stock.

Question 17

The National Banking Act set up the Federal Reserve System.

Question 18

Central banks can use their policy tools to affect money supply growth and credit availability but not the prices of securities.

Question 19

Central banking in the United States and in a majority of nations in the West operates principally by executive order and regulation, not through market forces.

Question 20

Like a supreme court justice, members of the Board of Governors are appointed for life.

Question 21

One of the channels through which central banks influence the economy is in affecting the relative price of domestic and foreign currencies.

Question 22

If the price of home currency falls relative to the prices of foreign currencies as a result of central bank action, the home country's exports will become more costly relative to imports from abroad, resulting in less domestic production, fewer jobs and lower incomes.

Question 23

If the central bank reduces a nation's rate of growth in its monetary supply (or money stock) income and spending in the economy should grow more slowly.

Question 24

The United States was one of the last major industrialized nations to charter a central bank, waiting until the twentieth century to charter the Federal Reserve System.

Question 25

Under the so-called dual banking system of the United States both the federal government and the states exercise significant regulatory powers over commercial banks.

Question 26

Dual banking systems are ideal because of the checks and balances that exist between the state and federal regulations.

Question 27

The Federal Reserve banks were not allowed to change their discount rate when the central bank was chartered; this power was acquired later with passage of the Glass-Steagall Act.

Question 28

The U.S. Treasury Department is charged with maintaining the stability and integrity of resources.

Question 29

The primary goal of the proposed new European Central bank will be full employment of resources.

Question 30

If the central bank raises interest rates, there will be a reduction in the value of financial assets.

Question 31

The role of the Board of Governors is to resolve policy disputes among member banks.

Question 32

Prestige is an intangible benefit of membership in the Federal Reserve System.

Question 33

Recent research studies have found a significant positive correlation between the inflation rate experienced by leading industrial countries and the degree of independence from the political process enjoyed by their central banks.

Question 34

The Federal Reserve directly answers to Congress.

Question 35

The Bank of Italy is considered one of the most independent central banks in the world.

Question 36

Recent research suggests that economies generally perform better (at least in terms of price stability) in those nations where central banks enjoy greater independence from government.

Question 37

Independence from government control enjoyed by central banks varies widely around the world.

Question 38

The Federal Reserve System depends upon the U.S. government for income to operate.

Question 39

Research reveals that central banks cannot significantly influence an economy's output and employment in the long run.

Question 40

The principal goal of the ECB, as defined by the Masstricht Treaty is to protect the value of the Euro.

Question 41

Once the European Central Bank is operating efficiently, the central banks of the EU nations will be converted to large, universal-style, commercial banks.

Question 42

Today, the principal target of most central banks around the globe is market interest rates.

Question 43

The Federal Reserve can influence the size of the money multiplier but not the size of the monetary base.

Question 44

The dollar volume of deposits that the banking system can create for each new dollar of excess legal reserves injected into the banking system is known as the deposit multiplier.

Question 45

Banks will sometimes maintain a protective "cushion" of excess reserves to meet unexpected withdrawals without falling below their required reserve holdings.

Question 46

While the concept of a deposit multiplier is useful, central bankers are usually more interested in the money multiplier, which defines the relationship between a measure of the money supply that is closely related to spending and income in the economy to the total reserve base available to depository institutions.

Question 47

The volume of currency and coin held by the public has a direct bearing on the reserves held by depository institutions.

Question 48

Monetary foundation is the sum of legal reserves plus the amount of currency and coin held by the public.

Question 49

High-powered funds as a term that is often used for monetary base.

Question 50

The measure of the money supply, M2 is an important factor in determining the rate at which the nominal GDP grows.

Question 51

According to your text, the functions of central banks usually include:

A) Control of the money supply
B) Stabilization of the money and capital markets
C) Direct lender to households
D) Maintaining and improving a nation's payment mechanism
E) A, B and C only are normal or usual central bank functions
F) A, B and D are all normal or usual central bank functions

Question 52

The national economic goal of reasonable stability in the general price level for all goods and services tends to conflict, according to your text, with the goal of:

A) Stable conditions in the money and capital markets
B) An improved balance-of-payments position
C) Full employment of resources
D) Rising nominal income and government tax collections
E) None of the above

Question 53

Your text discusses how the Federal Reserve System and other modern central banks affect or influence conditions in the economy and financial system. Through which channel or channels listed below do central banks like the Fed affect the economy and financial markets?

A) Changes in the cost and availability of credit
B) Changes in the volume and rate of growth of the nation's money supply
C) Changes in the wealth of investors as reflected in the market value of their security holdings
D) Changes in the public's expectations of future credit conditions
E) All of the above

Question 54

The Federal Reserve Act, creating the system of Federal Reserve banks, was passed by Congress and signed into law in:

A) 1863-64
B) 1913
C) 1933
D) 1934
E) None of the above

Question 55

The National Banking Act authorized the:

A) Establishment of federally licensed banks
B) Office of the Comptroller of the Currency
C) Taxation of bank notes issued by state chartered banks
D) Creation of a dual banking system
E) All of the above

Question 56

The most important function of the central banking system is:

A) Stabilizing money markets
B) Lender of last resort
C) Stabilizing capital markets
D) Controlling the nation's money supply
E) None of the above

Question 57

The financial system includes:

A) Federal Reserve Banks
B) Federal Reserve System
C) National banks and state chartered banks
D) The U.S. Treasury Department and the Board of Governors
E) All of the above

Question 58

Central banking in the U.S. is directed toward

A) Full employment
B) Reasonable price stability
C) Stable balance of payments
D) Sustainable economic growth
E) All of the above

Question 59

Which of the following can the central bank affect?

A) The cost of credit
B) The volume of growth of the money supply
C) The wealth of investors
D) All of the above
E) None of the above

Question 60

What are the required conditions in order for a new bank charter to be approved in the United States?

A) Not endangering the viability of local banks
B) Prior approval of the board of directors by the Federal Reserve
C) Must be profitable within a reasonable period of time
D) Must satisfy minimum equity capital conditions
E) All of the above are required conditions for a bank charter approval

Question 61

Which of the following did not cause the creation of the Federal Reserve System?

A) Need for a money or cash medium
B) Check clearing fees
C) Liquidity crises
D) Loan losses
E) All of the above contributed to the Fed's formation

Question 62

The early structure of the Federal Reserve was:

A) Centralized
B) Decentralized
C) Chaotic
D) Not what Congress intended
E) None of the above

Question 63

The key administrative body of the Fed is the:

A) Board of Governors
B) Federal Open Market Committee
C) Manager of the Open Market Account
D) President of the Federal Reserve banks
E) All of the above have roughly equal powers

Question 64

Members of the Federal Reserve System include:

A) National banks
B) State chartered banks that elect to join
C) Federal Reserve branch offices
D) All of the above

Question 65

Benefits to belonging to the Fed include:

A) Dividends
B) Prestige
C) Borrowing capability
D) All of the above

Question 66

Which of the following is not a reason the Fed began charging a fee for its services?

A) Improve service levels
B) Promote competition
C) Loss of revenue
D) Increase in customers using services
E) All of the above were reasons the Fed began charging for its services a few years ago

Question 67

The most critical objective of the Federal Reserve is to:

A) Avoid a liquidity squeeze
B) Maintain stability in government security markets
C) Carry out monetary policy
D) Provide information to the public
E) None of the above

Question 68

The function of the money supply or money stock in which money serves as a reserve of purchasing power is known as its:

A) Medium of exchange function
B) Store of value function
C) Unit of account function
D) Statement of account function
E) None of the above

Question 69

The function of money that makes possible the purchasing of goods and services is known as its:

A) Medium of exchange function
B) Store of value function
C) Unit of account function
D) Statement of account function
E) None of the above

Question 70

The principal policy tool used by the Bank of England to influence economic and financial conditions is:

A) Open market operations
B) Deposit reserve requirements
C) The lending rate
D) Margin requirements on purchases of bonds and stocks
E) None of the above

Question 71

The principal policy tool of the Federal Reserve System in influencing economic and financial conditions is:

A) Open market operations
B) Deposit reserve requirements
C) The lending rate
D) Margin requirements on purchases of bonds and stocks
E) None of the above

Question 72

The first central bank in the world, chartered in 1694, was the:

A) Bank of France
B) Bank of Italy
C) Sonos Bank of Athens
D) Federal Reserve System
E) None of the above

Question 73

The Federal Reserve System's chief policy tool when the System was first created was:

A) Open market operations
B) Moral suasion
C) Reserve requirements
D) Discount rate
E) None of the above

Question 74

The role or function performed by the Federal Reserve banks in which they record or keep the operating financial accounts of the U.S. Treasury and deliver and redeem U.S. government securities is known as the Fed's ____ function.

A) Fiscal agency
B) Lender of last resort
C) Check clearing
D) Currency exchange
E) None of the above

Question 75

Which of the following is not a goal of the central bank?

A) Full employment of resources
B) Stability of the general price level
C) Sustained economic growth
D) Balance of payments equilibrium
E) Zero inflation

Question 76

The national economic goal of sustained growth tends to conflict, according to your text, with the goal of:

A) Stable conditions of the money and capital markets
B) Price stability
C) Full employment of resources
D) Rising nominal income and government tax collections
E) None of the above

Question 77

Which of the following is not a function of the Federal Reserve System?

A) Clearing and collection of checks
B) Management of the national debt
C) Issuing coin and currency
D) Conducting monetary policy
E) All of the above are functions of the Federal Reserve System

Question 78

By controlling the rate of growth in the money supply, the central bank expects to

A) Influence the rate of growth in the economy
B) Reduce bank failure
C) Encourage banks to join the Federal Reserve System
D) Reduce the deficit
E) Control stock market activity

Question 79

In the event of a stock market crash, a primary function of the central bank is to

A) Buy stocks to stem the decline
B) Reduce the money supply
C) Provide liquidity to the system
D) Raise interest rates
E) Do nothing. The central bank should let markets work freely

Question 80

Recent research studies have often found a significant negative correlation between the inflation rate experienced by leading industrial countries and the:

A) Balance of payments positions of those same countries
B) Size of the government's budget deficits
C) Degree of independence of their central banks from the political process
D) Particular monetary policies followed by their central banks
E) None of the above